Free trade is a type of trade policy that inhibits trade barriers such as tariffs and quotas. Free trade agreements or treaties are established by two or more countries in order to lift trade barriers with the goal of economic growth for all parties involved. Free trade is a highly debated topic as it has the ability to benefit many people but not without negatively impacting others, which leads to the question of what are the pros and cons of free trade?
- Free Trade vs Protectionism
- Pros of Free Trade
- Cons of Free Trade
- Pros and Cons of Free Trade: An Overview
- Related Articles
Pros of Free Trade
- Economic growth
- Lower prices for goods and services
- Creation of new employment opportunities
- Wider variety of goods and services
- Elimination of monopolies
Cons of Free Trade
- Job outsourcing
- Lower wages and poor working conditions
- Negative impact on the environment
- Threat to intellectual property
- Reduces tax revenue
Free Trade vs Protectionism
The introduction of the free trade concept came when Scottish philosopher and economist Adam Smith published An Inquiry into the Nature and Caufes of the Wealth of Nations, most notably known as The Wealth of Nations. Smith claimed that the only way for a country’s economy to grow was to focus on its strengths and not produce everything on its own. This was to counteract mercantilism, which was previously seen as the best way to increase economic growth.
Mercantilism was the earlier concept of protectionism where the creation and consumption of domestic products and services were encouraged because it helped local businesses, supported job growth, and helped generate greater revenue for a country. The long-running debate of protectionism versus free trade seems to never settle as both concepts have positive and negative impacts to a nation’s economy and its residents.
Pros of Free Trade
When free trade agreements are established, economic opportunities expand as countries can concentrate on producing goods and services that they specialize in and import goods and services that would cost more than if produced domestically. If trade barriers are imposed, the price of imported goods would rise which can lead to inflation. According to the International Trade Administration, the United States has 14 free trade agreements (FTAs) with 20 countries.
Economic Growth Increases
Cross-border trade has the ability to increase economic growth as businesses have access to a larger market. When free trade agreements are implemented, it becomes easier for countries to produce products and services they specialize in and decreases the number of goods that need to be produced domestically. This is an important factor considering products produced domestically tend to cost both businesses and consumers more money.
Not every country has the means or resources to produce certain quality goods and as populations increase, it is especially difficult for developing countries to produce the necessary amount of goods and services on its own. This can lead to limited availability of products and make prices of those products skyrocket. If consumers had to buy a domestic product at a higher price, the consumer would then have less money to spend on other domestic goods.
Lower Prices for Goods and Services
Production of goods for free trade areas leads to lower prices. If a country produced goods or services domestically, it may cost consumers more if the resources being used to produce the goods were limited. For example, one of the largest imports of the United States is machinery such as computers and hardware. Producing machinery in the U.S. would be more expensive than importing it from foreign countries.
Not only does free trade affect the production prices, but the rise in cost of production trickles down to the consumer. Increases in the cost of production leads to increases in consumer prices and has the potential to negatively impact a nation’s economy. Consumers would buy fewer higher-priced items rather than more lower-priced items. Consumer spending can boost the economy if more goods and services are being purchased because it increases production and efficiency.
Wider Variety of Goods and Services Exchanged
Since certain resources are more available in certain countries, free trade gives consumers access to a wider variety of goods and services that would otherwise be limited. For example, Japan has limited natural resources and the importation of goods allows consumers of Japan to have access to various products that would otherwise be limited or not available at all. More competitors involved in free trade gives consumers more options between certain goods of various price ranges and quality.
Free trade stimulates production and as a result, opens up job opportunities. When trade barriers are set in place, it reduces the number of possible exports that a country could have. Increased production of exports due to free trade agreements means more profit for a country’s businesses and leads to more job opportunities. If products are in high demand, then a business must hire more workers in order to meet production needs.
Elimination of Monopolies
Free trade agreements prevent countries from monopolizing certain products and services as it allows more competitors to join the market. Less competition means a better opportunity for businesses or corporations to take over an industry, thus creating a monopolistic market and taking advantage of the opportunity to raise prices.
Cons of Free Trade
While free trade does offer many opportunities for the economy to expand and products and services to be traded at a lower cost, it can lead to negative impacts on certain groups of people and the environment.
Job outsourcing is a common occurrence that happens when free trade agreements are established. When goods and services come at a cheaper cost from foreign countries, jobs may become more available in those countries, but not in the country that is importing those goods and services. This is one of the major reasons that free trade is frowned upon because it directly impacts residents and local businesses of a country.
Protectionism helps domestic industries by guarding them against foreign imports that would take over. The Smoot-Hawley Tariff Act was passed by congress in 1930 in an attempt to protect American businesses and agricultural workers that were negatively impacted by the importation of cheaper European agricultural goods. The benefits of free trade agreements often come at a cost for workers in domestic industries when a foreign competitor is able to provide cheaper products and services.
Low Wages and Poor Working Conditions
Although the U.S. has many laws that prevent poor working conditions and extremely low wages, other less-developed countries do not have the same laws and regulations in place for their workers. Free trade encourages countries that do not have as strict of labor laws to exploit workers. If the price of labor costs less, so does the price of production which means that countries who pay workers low wages are able to compete with other foreign competitors by offering exports at a cheaper cost.
Child labor was quite popular in the U.S. during the beginning of the Industrial Revolution, but since then child labor laws have been put in place to prevent it. However, there are still countries today that do not have child labor laws or if they do, the regulations may not be enforced as heavily. According to the Bureau of International Labor Affairs, there are 77 countries that exploit workers and children through forced labor or child labor.
Free Trade Can Reduce Tax Revenue
When trade barriers are in place, countries profit off of the tariffs, or taxes, that are levied on goods and services. Tariffs help countries build tax revenue and when free trade agreements are established, revenue is reduced. This is particularly harmful to developing countries that need the revenue to support their economy. For this reason, developing countries are less likely to participate in free trade agreements because they would have to come up with different ways to make up for the losses in tax revenue.
Negative Environmental Impact
The U.S. has implemented various laws and programs that help protect the environment. Industrialization causes pollution which can lead to climate changes and negatively affect the environment. Without protection laws and programs in place, industrial cities can suffer significantly from pollution and the depletion of natural resources through mining and deforestation that is fueled by free trade.
Free trade increases the production of goods and as a result, pollution and the depletion of natural resources become serious problems if environmental regulations are not followed. Many countries have environmental regulations in place, but there are some that have loose policies or do not adhere to the regulations.
130 countries pledged to take precautionary measures in an effort to reduce global climate change by signing the Paris Agreement which is an international treaty that was put into motion in 2016.
Pros and Cons of Free Trade: An Overview
Free trade can be seen as both beneficial and harmful to nations. Free trade agreements can stimulate economic growth and open up more opportunities for the exchange of goods and services. In contrast, free trade can negatively affect workers because as the importation of foreign goods increases, less work becomes available to those in certain industries.
Consumers often benefit from free trade with wider varieties of goods at lower prices, but some of those goods may come at the expense of workers in foreign countries that fall victim to unreasonably low wages and poor working conditions, not to mention the environmental impact it has when countries do not adhere to protective environmental regulations. In all, free trade cannot be directly pinned as good or bad because there are consequences to both ends of protectionism and free trade.
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